US West, Global Crossing plan $ 37 bn merger

The expected deal would mark another bold move by Global Crossing, which agreed in March to buy local and long distance phone company Frontier Corp. for about $11.2 billion.

Global Crossing was founded two years ago by Gary Winnick, a former associate of junk bond king Michael Milken, and launched its initial public offering just nine months ago.

The deal would combine Global Crossing’s undersea and land-based fiber optic networks with the 17.5 million local telephone lines and data operations owned by U S West and Frontier.

The combined companies would create a strong rival to telecommunications behemoths such as AT&T Corp and MCI WorldCom Inc. The deal also would leave Atlanta-based BellSouth Corp as the only Baby Bell phone company without a merger partner.

As the first step of the complex deal, U S West is expected to buy 9.5 per cent of Global Crossing’s shares in a cash tender offer. The companies then will merge, creating a company with annual revenues of about $17 billion and a market capitalisation of $74 billion, sources said.

The combined company will have two separately traded stocks, sources said. One stock, which would not pay a dividend, would reflect the companies’ high-growth businesses such as the fiber optic networks, Internet and data operations, as well as U S West’s PCS (personal communications services) wireless phone business.

The other stock, which would pay a dividend, would reflect the more traditional businesses such as the local phone operations of U S West and Frontier, as well as U S West’s directories business, sources said.

Bob Annunziata, Global Crossing’s chief executive, and SolTrujillo, U S West’s chairman, CEO and president, are expected to be named co-chairmen and CEOs of the combined company, sources said.

Under the deal, shareholders of U S West would own 50 per cent of the equity of the new company, with shareholders of the combined Global Crossing-Frontier owning the other 50 per cent, one source said.

The negotiations hit some delays last week as Global Crossing’s original merger partner Frontier caught wind of the U S West talks. Frontier did not technically have veto power over the Global Crossing-U S West deal but the companies wanted Frontier’s cooperation, sources said.

Frontier hired investment banking firm Morgan Stanley DeanWitter to evaluate the potential deal and blessed it over the week-end, sources said.

The Global Crossing-U S West deal could run into some regulatory problems, analysts said. Under the 1996 Telecommunications Act, Baby Bells such as US West can not offer long distance service in their home regions until they open their local markets to competition.

Since U S West does yet not have permission to offer long distance service in its home territory, the combined company may have to get a waiver or divest the small long distance business frontier operates in U S West’s territory. U S West serves customers in 14 western states from Minnesota to Washington.

The combined companies also would face some vast cultural differences, analysts said. Entrepreneurial Global Crossing, under the vision of Winnick, has been a Wall Street darling as it moved aggressively to amass high-profile executives. Its stock has surged more than 381 per cent since its August 1998 IPO.

Local phone companies US West and Frontier, meanwhile, remain largely traditional utilities despite recent efforts to move into high-growth areas such as data and Internet services, analysts said.

Once the expected U S West-Global Crossing deal closes, BellSouth would be the only solo Baby Bell of the original seven companies spun off from AT&T in 1984.

BellSouth last month agreed to buy a stake in Qwest Communications International Inc, the No 4 US long distance company, but it does not have a merger partner.

Among the other regional Bells, New York-based Bell Atlantic Corp. plans to buy Texas-based phone company GTE Corp, and Texas-based SBC Communications Corp plans to buy sister Baby Bell Ameritech Corp of Chicago.